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Posted by Bill Luby

FT trader/investor for past 6 years. Previously worked for two decades as a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon. More broadly: I'm a militant eclectic, but a pacifist of the heart. I'm non-judgmental, yet very discriminating.

How to Play a Volatility Spike (Guest Columnist at Barron’s)

by Bill Luby on November 6, 2016

in Commodities, Technical Analysis

Yesterday, I was pleased to once again have an opportunity to pen a guest column for Barron’s, pinch hitting for Steve Sears in his The Striking Price column with How to Play a Volatility Spike.  If my math is correct, this is the nineteenth time I have been a guest columnist in this fashion.  I always try to keep my subject matter linked to current events, but the irony is that when the signal comes to grab my bat and make my way to the on-deck circle, invariably the markets are hit with a bout of volatility.  The result is that as a “volatility guy” I often end up talking about what to do in an environment of elevated volatility, as was the case in Seizing Opportunity from Stock Market Volatility, Be Greedy While Others Are Fearful, Calm Down and Exploit Others’ Anxieties and There’s Opportunity in Uncertainty.
My thesis in the Barron’s article is fairly simple and should not come as a surprise to those who have been paying attention to what I have been saying in this space over the course of the past decade:  VIX spikesare typically a gift from the mean reversion gods.  The trick, of course, is in the timing of the mean reversion – and perhaps whether to bother to make the distinction between mean reversion and median reversion.
In the chart below, one can see VIX data going back to 1990, with the mean of 19.71 added as a dotted red line.  Even a quick glimpse at the graphic reveals just how difficult it is for an elevated VIX to stay elevated, regardless of the cause.
 [source(s):, VIX and More]

The Barron’s article talks about some trading opportunities that arise from VIX spikes and includes a bull put spread trade idea involving QQQ
I have remarked on a number of occasions in the past that whenever Steve Sears reaches out to me to pen a guest column, inevitably some invisible market force snaps to attention and arranges for a volatility spike.  Either Steve has some amazing insight into the future of volatility (not unthinkable for a guy who was a driving force behind the creation of the ISEE Index) or some other unseen forces are toying with me.  If this happens one more time I am going to start to wonder if I have an obligation to publicly disclose future column requests…
In the meantime, tune out as much of the election hysteria as you can and consider all the gifts from the mean reversion gods that looked too risky to accept at the time.
Related posts: 

A full list of my (19) Barron’s contributions:
How to Play a Volatility Spike (November 5, 2016)
Playing Volatile Oil Prices (March 12, 2016)

How to Ride an Aging Bull (November 29, 2014)
How to Spot Risk Early (July 16, 2013)
The Case for Options Trading (January 2, 2013)

Disclosure(s): the CBOE is an advertiser on VIX and More

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